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Bram de Haas
Bram de Haas
Articles (284)  | Author's Website |

Carl Icahn and Keith Meister Ready to Take Energen Private

Notes on Icahn's latest dealmaking concerning an interesting Permian energy play

May 22, 2018 | About:

Carl Icahn (Trades, Portfolio) and Keith Meister bought 9% of Energen (NYSE:EGN) together and they have expressed a willingness to take the entire company private. Icahn talked to CNBC about the investment extensively. You can watch the video below ,but I've summarized his position and included background information in these notes. To start, here's a slide of the most recent presentation by the company:

Apparently shareholders were calling Icahn to complain that they were being taken advantage of.

Icahn and team think it is attractive on a risk-reward basis and that it looks quite undervalued.

Why he wants to buy it

"If I could buy this company just looking at it, and I'm not yet an expert in it, I think its undervalued. We have the capital and we have a lot of cash around. We can buy it with Keith, without Keith or with a group or without a group."

The slide below shows the company's reserves:

As you can see, these reserves are based on a WTI Oil price of $51.34 per barrel. As I'm writing this, WTI is actually $72.50. That's approximately 40% higher and likely to greatly increase the reserves allowed to be put on the balance sheet.

Does he really want to buy it or flip to a strategic?

"I don't presume to feel that I'm the right buyer for it. RSP Permian (NYSE:RSPP) which is quite similar to Energen. They put 80k an acre for. We sell at 7x EBITDA. They paid 10x EBITDA. Energen is worth $100 per share. But I can't afford that because we don't have the synergies."

Why is he coming in?

"The board isn't doing its job which is to let shareholders decide what to do with the company."

Icahn gives the appearance that he is completely fine with a strategic coming in and buying it at $100 per share, which is about 50% higher.

Meister has been an activist already in this company. They made an arrangement where Meister would get two board members. They also promised they would do a process where they would look for buyers. But we haven't heard from them.

Who is the right buyer?

There is almost always at least one really interesting remark that Icahn makes in his interviews and this time it is when describing who the right strategic buyer would be. At first he was talking about synergies, but we've heard that story before. Then he said that as an activist you look for unique situations. He described the real thesis here:

This is a company with 150,000 acres in the Permian with great oil reserves.

There isn't enough pipeline capacity in the Permian to transport all the oil out. Many companies are not able to get market price for oil because they need shell out so much for transport out of the Permian. Icahn is implying that's the case with Energen.

He adds that there are companies with enough pipeline capacity but not enough oil in the Permian as well.

"We think there are companies for whom this would be a great fit. Those especially should be interested," he said.

Fellow activist Elliott Advisors and Paul Singer (Trades, Portfolio) also has a 4% position.

Icahn had no conversations with Singer. 

On the market

Icahn also talked briefly about several other investments but revealed nothing that's super interesting. At the end he did talk about his market view, which has changed. Previously Icahn had been very bearish and it appears he's lighting up, which is especially apparent from the changes made to his hedges:

"Great news about the tarriffs and not having a tariff war. Trump did 100% the right thing by getting rid of regulations that strangle companies. Really believes in the tax things. Tariffs are a tough thing. But you can't let countries steal your intellectual properties. Doing a deal with China is great if it can happen," he said.

On hedging

"Over the last few months my hedges aren't nearly as big a percentage of the portfolio. Some companies like Cheniere Energy (LNG) and our refineries did really well. Cheniere is certainly going the beneficiary of the rest of the world needing energy," he said.

By referring to the spreads, Icahn seems to imply that liquified natural gas will do much better with oil rallying as hard as it is.

Watch Icahn himself talk about his latest chess moves:

Disclosure: Long Icahn Enterprise (IEP) and may initiate a position in Energen (ENG).

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website


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